But penny stocks have been involved in what are known as Pump and Dump scams.
Anyone who has seen the 2013 film “The Wolf of Wall Street” is familiar with the notion of penny stocks. While they are quite legal there are illegal ways to promote them and manipulate their value.
And as usual, the truth is stranger than fiction. Consider the case of Jonathan Ledbed. Ledbed was a 15-year old who bought penny stocks and then promoted them on internet message boards, hyping up their potential and value, thus creating artificial demand. He then indicated a price increase, making it look as though the stock was in demand and valuable. Once enough investors bought the stock the teen sold his at a profit and left the other investors at a loss.
Pump and dump schemes are not that uncommon and can initiate with a call from a telemarketer in a “boiler room” brokerage house (much like” The Wolf of Wall Street” scenario) or a fake press release and quite typically in an email. Usually these messages claim to have “insider” information and the stock hype permeates internet message boards such as ADVFN.
Manipulators choose penny stocks because they are more are able to ply their trade when no independent company information is available. Therefore, penny stocks are generally not traded on the New York Stock Exchange or NASDAQ but instead “over the counter” in markets such as the Pink Sheets or OTC Bulletin. This is not to say that penny stocks are suspect, but they have been used in unscrupulous ways. If you are unsure if your broker or stocks are above board then talk to an attorney experienced in securities and find out.
On behalf of MihalekLaw posted in Securities Law on Thursday, July 14, 2016.